Prospects for 2H19: How have risks changed for emerging Asia? The Philippines: Geared for take-off as reforms pay dividends

Highlights from the CAA Weekly Table

What has changed?

  • Two conflicting forces are at work in the global economy: Geopolitical risks in the Middle East could worsen, raising oil prices further, which will take a toll on global growth. But, major central bank’s policy shifts have produced easier monetary conditions which will offset some of this weakness.
  • Policy reaction in Asia is critical: The beleaguered Indian economy has been further beset by a delayed monsoon and the deepening liquidity crunch, stronger fiscal support is likely when the delayed budget statement is issued in July. Indonesia is set to step up monetary and fiscal stimulus. However, the Philippines central bank refrained from another rate cut, pausing to assess the impact of previous easing. Thailand’s political challenges appear to have weakened its capacity for effective action just when the it is needed to support growth.
  • Asian political risks: Continued protests in Hong Kong could end in tears unless protestors avoid further provoking the Beijing authorities. In Malaysia, Anwar Ibrahim’s chances of smoothly succeeding Prime Minister Mahathir could be in jeopardy as the ruling Pakatan Harapan coalition is at risk of being rent apart by internal schisms.

Prospects for the second half of 2019: How have risks changed for emerging Asian economies?

  • The global economy has become more fragile of late, with the recent deceleration reinforced by the US-China trade spat, headwinds to China’s growth and geo-political tensions.
  • The most likely scenarios for each of these dangers, however, suggest that global demand for Asian exports should recover in the second half, though the rebound is likely to be muted as global capital spending will remain patchy. A limited agreement between US and Chinese leaders to resolve some of their trade frictions at this week’s G20 summit meeting could improve business confidence and release some of this pent-up demand for investment.
  • Another key to Asia’s prospects will be the tepid recovery we see in the troubled Chinese economy. This should generate positive spillovers by way of outbound tourism growth, a rally in cyclically-sensitive commodities and improving risk appetites of global investors.
  • The dangers to Asia come from geopolitical flashpoints. Be it the standoff between the US and Iran in the Persian Gulf, or protestors in Hong Kong dangerously testing the Beijing leadership’s patience, the risks seem skewed to the downside.

The Philippines: Geared for take-off as reforms pay dividends

  • Tax reform has broadened the revenue base and increased the tax share of GDP. The debt ratio has halved from 90% in 2014, with external debt/GDP falling. This in turn has allowed a surge in infrastructure spending which is boosting economic development.
  • The Administration now has the numbers in the Senate to ensure passage of the remaining tax packages by 2020. This will help raise the government’s contribution to national savings while keeping the current account deficit under control.
  • Tourism and the return of peace to the troubled South could help catalyse a growth spurt in the medium term. Full-year growth in 2019 is likely to come in between 5.7%-6.3%, driven by domestic demand, the infrastructure initiative and monetary easing.

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